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Supermarket coronavirus

The Coronavirus Crisis challenge for the supermarket industry.

Background

The Coronavirus Crisis (CVC) highlighted some on-going challenges the supermarket industry faces. This blog will highlight that an over reliance on ‘the system’, historical data and a limited understanding of shoppers created shopper dissatisfaction during the CVC.  

For ease of use this blog will regularly refer to Woolworths. Woolworths supermarkets are Australia’s largest supermarket. Woolworths have reacted to the CVC in a similar manner to most supermarkets in affected countries.

The CVC started in China in December 2019. During January 2020 the virus spread and on January 30, 2020 WHO (world health organisation) declared coronavirus a global emergency.

Customer Centric Retailing (the system)

Consumers today expect to be able to buy almost anything, anywhere, at any time – and at low prices to boot.’

McKinsey , Reviving grocery retail: Six imperatives, 2018

Shopper Power

Manufacturers and supermarkets (the industry) understand the power shoppers now have. For example, Jim Blasingame, in his book The Age of the Customer , explains shoppers now control the relationship with sellers and they also control the product information. During the CVC, due mainly to O/O/S (out of stocks), shoppers have temporarily lost the ‘power’. For example, they are unable to buy toilet rolls whenever they want. This has led to a change in their behaviour.

Due to shopper power the industry generally adopts a customer centric approach to maximise shopper satisfaction. For example, Woolworths Half Year Results, lists the first key priority as ‘Customer 1st Brand, Team & Culture’.  

The System

To achieve a customer centric model the industry has invested in data and infrastructure to better understand and serve shoppers. Sales data (scan) has evolved from a stock control / forecasting tool to a shopper insights tool. Other data sources are also regularly used to improve the CX (customer experience). For example, Woolworths Half Year Results , uses VOC (voice of customer) and NPS (net promoter score) data to evaluate the supermarkets’ performance vs shoppers’ expectations.

A key component of the customer centric model is a responsive supply chain that can meet the ever-changing demands of shoppers. The supply chain is from manufacturers production facilities to the store. The industry is continually investing in an improved supply chain to better serve shoppers. As reported by SMH Woolworths plan to invest $135M into a fresh food DC in Truganina (near Melbourne). This investment was made in addition to the new fully automated $560M warehouse in Dandenong, Victoria.

Unfortunately, the CVC has highlighted that using a customer centric model, supported by major investments in data and infrastructure will not always meet shopper demands. So, what happened?      

CVC created an instantaneous, large change in demand

The CVC did change shopper behaviours quickly. As outlined by Nielsen (Key Consumer Behaviour Thresholds Identified As The Coronavirus Outbreak Evolves, 2020) most shoppers will go through six thresholds (stages) as they react to CVC. For example, #3 Pantry Preparation will include shoppers ‘stockpiling of shelf-stable foods’.  

In theory, a customer centric model (including data, infrastructure) should be able to deal with this sudden change in shopper demand. The industry deals with spikes in demand regularly. For example, weekly price promotions through to major occasions such as Easter and Christmas. For some categories, especially fresh produce, demand can change quickly due to unplanned factors, such as the weather. For example, demand for salads will increase on hotter days. Again, in theory, the system is designed to be able to deal with these regular changes in shopper demand.  

What was unique about this situation was that it was a large, instantaneous change in many categories. For other sales spikes, e.g. price promotions and Easter, the industry can plan months in advance to meet the short-term spike in demand. The CVC has highlighted that the system cannot respond to an instantaneous, large increase demand across many categories.  

Why didn’t the data predict this increase in demand?

The CVC highlighted that retailers lack a key piece of data about shoppers – what are their planned purchases?

The data used by forecasting / planning teams is historical data. Over reliance on historical data can lead to O/O/S (out of stocks). For example, Winsight Grocery Business (Inventory Management: Out of Time for O/O/S (2018)) suggests that the industry average O/O/S rate is 8%. As reported by retail week (Data: Grocery out-of-stocks surge tenfold as bulk-buying intensifies, 2020) UK grocers O/O/S rate increased from 1.3% on February 25 to 11.6% on March 18 due to panic buying by shoppers during the CVC.

During the CVC the on-going O/O/S for toilet rolls highlighted that historical data is not always an accurate predictor for future demand. As reported by AFR (Woolworths sold a week’s stock of toilet paper in one day, 2020), on the weekend of 14th / 15th March 2020 Claire Peters, Woolworths Managing Director, said that Woolworths sold ‘a week’s stock of toilet paper in one day’. News.com.au (Coronavirus: Coles announces it’s suspending online shopping, 2020) reported that Woolworths was ‘selling seven weeks supply of toilet paper each and every day’.  This was 6 weeks after WHO declared coronavirus a global emergency and approx. 4 weeks after Aussie shoppers started panic buying toilet rolls. This example highlights that shopper demand did increase significantly for a long period of time.

Simply put the industry needs to focus more on what is on shoppers’ shopping lists – not what they bought last week / year.

Why didn’t the data / insights predict the change in shopper behaviour?

Importantly data / insights are also used to predict how shoppers will react to a change. Obviously, the data / insights did not predict the panic buying and aggressive behaviour by shoppers during the CVC. Shoppers normally exhibit panic buying for a short period. For example, shoppers can panic buy food on Christmas Eve. What was unique about this situation was that the panic buying has continued for a long period of time across a number of categories.

Another example of the data / insights not predicting how shoppers will react was ‘bag rage’ in 2018. When Woolworths tried to replace free, single use plastic bags, with reusable bags costing $0.15 customers reacted with ‘bag rage’. In response Woolworths did offer free reusable bags during the transition. ‘Bag rage’ did effect Woolworths sales results in Q1, 2019 .

Another indicator that the industry does not always understand shopper demand is that 80 – 85% of all FMCG launches fail (Nielsen, Setting the record straight on innovation failure, 2018). This result highlights that with all the data / insights the industry now has, it still launches / ranges products that fail. IMHO (in my humble opinion) this result is, in part, due to companies chasing sales / share.

High quality insights / data is fundamental to the system meeting shoppers’ demands. The CVC, and other examples, highlights that data / insights will not always accurately predict how shoppers will behave. In these situations’ the industry should rely more on peoples’ expertise to predict shopper behaviour. Also, in the future the industry needs to include more predictive research. For example, Woolworths’ VOC (voice of customer) research could move from reviewing shoppers’ previous shopping experiences to asking how will the CVC change what you buy next time? The change will be to focus on future shopper demands / changes in behaviour.   

Why didn’t the supply chain meet increased demand?

The supply chain, from manufacturers production facilities to stores is flexible and when planned can meet spikes in demand. These spikes literally happen every week when SKUs are put on promotion. For other major events, e.g. Easter and Christmas, supply again is managed to meet shoppers demands.

The CVC highlighted that the supply chain was not flexible enough to handle on-going increased demand across many categories. In response to the on-going increased demand retailers, such as Woolworths, implemented many changes to better manage demand. These included limiting the number of items a shopper can buy, e.g. limit 2 packs of toilet rolls. They also decreased shopping hours to give staff more time to clean and re-stock stores. Staffing levels in store and DCs (distribution centres) were increased. Plus, the number of deliveries were also increased to handle the increased volume of sales. Also, online orders were cancelled for a period. The industry believes that this was a demand, not a supply side issue. As Claire Peters, Woolworths Managing Director, said ‘we want to slow the panic down’ News.com.au (Coronavirus: Coles announces it’s suspending online shopping, 2020).

Disappointingly the industry was not able to meet shopper demand during the CVC. Simply put the infrastructure, from manufacturers’ factories to stores, did not have enough flexibility to quickly respond to a major sales spike in many categories. This result highlights that ‘the system’ relies on planning rather than quickly responding to changes in shopper demand.  

Summation

The CVC has dramatically highlighted some on-going issues in the industry. Disappointingly, the industry has invested in a customer centric model but was not able to meet shopper demands during this period. Shoppers were dissatisfied, abusive and in a small number of cases violent, because their expectations were not met.

Hopefully, the CVC can be a catalyst for change and the industry can learn from this dramatic event. Obviously, the industry needs a greater understanding of shoppers. This can be achieved by including more predictive research / insights into decision making i.e. remove the over-reliance on historical data. Also, the industry needs to review ‘the system’ to determine how best to respond to changes in shopper demands in the future. This should include a shift from relying excessively on data / business cases to also valuing peoples’ judgement in these unique situations.

The information provided in this blog post was general in nature. If you require more information I offer a free initial consultation by completing a contact us form.

Thank you,

Tim Bowen